One of the biggest deficiencies of emerging markets, as they become bigger, is that they are not participating enough in setting up the global agenda, according to Reserve Bank of India (RBI) Governor Raghuram Rajan.
In his keynote address at the St. Xavier’s College in Mumbai on Thursday, Dr. Rajan said emerging markets needed to participate more in setting the agenda to ensure that their interests were also taken into consideration. He said that in a highly integrated global market, measures such as quantitative easing (QE) in the U.S. had a large impact on emerging markets. “Emerging markets only react to the Western agenda and should voice their views and offer their own agendas.”
“While such policies will have positive effects on the country that is initiating them, they should have positive effects on net for everyone else also,” he said, adding that the accommodative policies of the western countries could have an adverse impact on a country like India.
“We are in the same boat, India and other central banks. IMF is looking to do some things that we have been suggesting in terms of the spill-over effects that QE has on developing countries.”
On multilateral institutions like the International Monetary Fund (IMF) and the World Bank, the RBI Governor said “even if they are immune to power politics, they are not immune to cognitive capture,” he said. India needed to improve access to healthcare and improve the quality of education in the coming years. “We need to create an enabling framework so that we get strong infrastructure growth in roads, ports, airports, power and logistics and have to alter business regulations to reduce paperwork. But we should not deregulate particularly in areas of environment and land regulations.”
Replying to queries from the students, Dr. Rajan warned against ‘demonizing’ global capital.
“We have relied on foreign capital for a long time and there is nothing bad in relying on foreign capital or having a small fiscal deficit.’’ Countries like Canada and Australia had grown on the back of a large current account deficit. But he said, “rather than short-term money it is important to attract long-term foreign direct investment.” Further, Dr. Rajan said India had enough foreign exchange buffer to deal with any global volatility, “but the buffer cannot protect against all volatility. We need to be careful because we are not a reserve currency like the U.S. dollar. We have built a buffer of reserves but we must bring down the fiscal and current account deficits.”
